With this stock you have to take the good with the bad, seems like a very apt platitude,
after holding Tesla for 5 years. And I am somewhat a messenger, trying to evaluate the
future of this company. But bringing bad news can be an unpopular stance, especially if
the news is telling people that they may lose money, be it just temporarily.
If I think Tesla is going to go through some bad periods then I will tell you, and tell
you why in as much detail as I can as to why, so you can make up your own mind based on
the same information I am using. I think long term Tesla will do exceedingly well. But just
look at that stock graph, the ups and downs have been crazy. And I think it would be naive
to think that these volatile turns in the stock price, may not continue. Therefore,
if you are trading, or still accumulating your position, then I think it is good to
know if Tesla may have a down period, like how I think Q2 may play out.
Q4 However, though, we also have Q4. Now we know
Q2 will be tough, due to the China shut downs, and the expense of running these new factories
before they hit volume production, and of course the delay with the 4680 production.
But it sounds like Tesla Shanghai is going to make up for their down time, and then some.
In fact Elon gave us some numbers on the earnings call. Enough information to get a good idea
of just how many units we might expect by the end of the year.
Just to quote what Elon said on the earnings call:
"So I think notwithstanding, with new issues that arise, I think we will see a record output
per week from Giga Shanghai this quarter, albeit we are missing a couple weeks. So that
means that most likely vehicle production in Q2 will be similar to Q1, maybe slightly
lower. But it’s also possible we may pull a rabbit out of the hat and be slightly higher.
But it’s roughly on par. But then Q3 and Q4 will be substantially higher. So it seems
likely that we’ll be able to produce over one and a half million cars this year. That’s
my best guess."
That was a very under rated statement. Elon is saying Q2 production might be lower in
Q2 than Q1. Q1 production was 305,000, so perhaps Q2 might be only 300,000, and perhaps
deliveries will be around that as well.
Q1 deliveries were 310,000, so if you add those up, then we are at 610,000 deliveries
for the first half of the year. If Elon thinks it's likely they will produce over 1.5 million
cars for the year, then that would mean they expect to produce 900,000 for the second half,
or 50% more than the first half. Well that would be inline with what Elon said,
Q3 and Q4 being substantially higher. Now I would guess that Q4 is also a bit higher
than Q3 given the fact they would be ramping.
I think it would likely mean that Q3 is around 400,000 and Q4 around 500,000 units. Wow 1/2m
units in Q4, that seems amazing, and this is what is being said.
Not only that Elon also said: "Yeah, 4680 output is not a risk to achieving
one and a half million vehicles produced this year, but it would become a risk next year
if we do not solve volume production by early 2023, but we’re highly confident of doing
so."
Implying that this level of production can be achieved without even 4680 cells being
ramped up to volume production. Therefore we could take a cross-section of Tesla at
this stage, and place a valuation on the company. What exactly are we trying to value here?
I think a valuation of Tesla without 4680 cell production ramped. Elon seems confident
they can achieve it by this stage, or the following quarter at the latest. But in case
it takes longer, and the market over reacts, lets try and establish a more intrinsic valuation
of the company, in case for example the market did over react, and crushed the stock price,
then we would know the value of Tesla still, and have the conviction to purchase the stock
at these potentially low prices.
NEW FACTORIES The trick here is going to be to establish
the run rate of these new factories, and the actual cost of running them. Despite all the
modern manufacturing processes the new factories contain, it's possible we are not using them
yet, and are still having to resort to the old techniques as a back up, due to 4680s
being delayed.
Another important quote from Elon was: "We also have, just as a risk mitigation,
2170 nonstructural pack capability here at Giga, Texas as well, but if things go according
to plan, we will be in volume production with 4680 sometime perhaps towards the end of the
third quarter and certainly in the fourth quarter."
So that implies that Texas may have to resort to nonstructural 2170 packs possibly. I mean
it does sound like Elon is confident the 4680 production will ramp up, but I want to value
the company based on Q4, without 4680 being ramped, and Tesla having resort to 2170 cells
in both factories. I think this is good to assess the downside. Yes, I am a Tesla bull,
and I can do crazy valuations as well, but I also like to know my level of exposure to
potential risk as well.
MODELS Therefore I think it will be necessary to
get a break down of each model from each factory to try and evaluate the earnings Tesla may
be generating by the end of this year, if the 4680 line has not yet been successful
to the levels we hope. Allocating 1/2m cars in one quarter is actually
not easy, it's a lot of vehicles. I have placed 150,000 in Fremont, up from around 120,000
in Q1. Elon has said they expect Fremont to increase production still.
I am going to place both Texas and Berlin at volume production, totaling 60,000 units
each. That is plenty of time for those lines to reach volume production, based on the history
of Shanghai. I expect most of the growth to still come
out of China, especially without 4680 cells. However, this leaves an insane 230,000 units
out of Shanghai, in order for us to reach 500,000 units total. Now Elon did say China
will come back a vengeance. I get the feeling China is being more sandbagged than already.
I think they can already hit a million vehicle annual run rate there already. It will be
the batteries, which are coming from CATL, and it sounds like they will have plenty by
that stage. Elon didn't actually mention anything about being chip constrained any more.
Anyway, that gives us a rough break up of what will be produced and where, if we have
a 500,000 production quarter in Q4.
ASP I am just going to use today's prices for
the average selling price. I am placing Berlin higher as it could still be the performance
model they are selling there. I am placing the Austin one lower, as we don't really know
what they will sell there yet, and if it's a 2170 model it might be the long range or
performance version. But as this is more of a bear case scenario, I am going to lock in
the lower price. That generates $30 billion of revenue.
MARGIN I am then going to assign the margin I think
each factory will be producing for each model. Now in this model we do get to use the new
price increases. Now according to my research, it looks like Tesla did have some long term
contracts for a lot of their raw materials. Therefore I think that these price increases
are also going to mean some margin has increased too. In other words, I think Tesla have raised
their prices more than their costs have increased.
Zach Kirkhorn said on the call: "We do have higher ASPs in our backlog, which
will help to offset some of these headwinds". Implying they are expecting higher margins
on the higher ASPs when they kick in. And they would have all kicked in by this stage.
However, we need to also factor in the two new factories, now if they have hit volume
production, which we are saying they have, then I think they could reached a margin of
around 22%. Remember we are likely not factoring 4680 cells, structural pack, or possibly not
even front castings. We haven't seen the next evolution of cost savings in this scenario.
When Tesla was ramping up the Model 3 line to volume production we had total margins
down around 20% during this period, that was being subsidized with Model S and X too. I
am guessing that these facilities do cost a lot less to run relatively, than when compared
with california, though, and Tesla need to produce fewer models to break even.
Anyway, this could be debated, as to what margin they should be seeing, but at a guess
this level of production is still adding to net profit, rather than taking away, which
we would expect in Q2, and possibly Q3 too. This comes in at $8.8 billion gross auto profit.
FINANCIALS We'll just go through the rest of the valuation
reasonably quickly, when we add FSD and credits we come to a total gross revenue of over $30
billion, this equates to a 31.6% gross margin. Compare that with 32.9% from Q1, I think if
Tesla hit this, then they have really caught up and not let the new factories affect earnings
too much. Of course we don't know what the margins have been like for what could be a
more difficult Q2 and Q3.
The other sides of the business are likely still not affecting earnings in any other
major way, and I have assigned where I think OPEX might be at that stage, with a reasonable
rise S, G and A. This all ends up at a net profit of $6.7 billion.
Or around $27 billion annualized.
VALUATION Now as this is somewhat a bear case we are
presenting here, then we are not expecting to have had any other major break-throughs
in technology like FSD that could shot the stock up. So we will try and keep a more focused
p/e ratio to bear that all in mind. Equally at this stage we are still not seeing the
4680 line ramped, perhaps Elon is saying it might be until later in 2023. As in we do
not yet see the signs of Tesla going to the next level.
Therefore, if this is the case, it should be somewhat disappointing. Today's valuation
of the stock is about 70 to 80 times an annualized figure of the Q1 earnings.
If things have not progressed much from then, I think even a p/e of 50 relative to the quarter
might be more likely. Excluding what any macro issues might have done to the markets. I am
not trying to predict macros, or black swans, I am not Nostradamus.
Either way, I think that would mean a stock price of $1300.
I mean we are still talking about double growth in earnings from Q1 to Q4, the market will
see that and realize the growth is still coming. They may not be so aware with the potential
issues of the 4680s if they are not ramped up soon from there. As in the growth of the
company will slow significantly without them. Anyway, I think that should mean Tesla hit
a stock price of $1300. Now this is not my price target, my price target is $1500 for
the year. This is me doing my best to estimate a stock price based on the events I have mentioned
occurring.
SUMMARY I think another way of describing these events,
might be the stock price Tesla will reach, when the factories are ramped up to absorb
all current battery supply, that is not in-house, aka 4680. This is the largest Tesla can grow
with the previous technology, it will take 4680 and structural battery packs to level
up the company to the next level of exponentials. This is still a 30% increase from now until
the end of the year, which is still a great return.